The Message From Amazon And Microsoft: The Cloud Rules

Charley Blaine 
Shares of Amazon.com AMZN +14.19% and Microsoft MSFT +10.45% soared Friday as investors digested surprisingly vibrant profits and prospects from their cloud operations.
In fact, were it not for Amazon, up 14.1% to a record $445.10,  and Microsoft, up 10.5% to $47.87, the major averages probably would have turned in losses for the day.
The  Nasdaq-100 Index was up nearly 60 points to 4,537. Amazon and Microsoft contributed nearly 55 points of the gain by themselves. If you throw in Starbucks SBUX +4.9%, up 2.4% or 1.6 points, Seattle-based stocks generated 56 points of the Nasdaq-100′s very pleasant performance.
The Dow Jones industrials were up 21 points on the day to 18,080. Microsoft contributed 30 points to the index’s gain. The rest of the index was off 8 points.
Oh, and Amazon CEO Jeff Bezos made $4.6 billion in a day.

Jeff Bezos, chief executive officer of Amazon.com Inc. and founder of Blue Origin LLC, speaks at the Ignition: Future Of Digital conference in New York, U.S., on Tuesday, Dec. 2, 2014. Bezos said Amazon shares will remain volatile due to new businesses. Photographer: Peter Foley/Bloomberg via Getty Images

But there are a few other important points to be made here.

First, the cloud is far more important and valuable than maybe a lot of investors had thought. Amazon Web Services, Amazon’s cloud business, generated more than $5 billion in revenue in the four quarters than ended on March 21. It looks headed to $6 billion in revenue in 2015. On a percentage basis, AWS is the most profitable segment in Amazon. And, as Brian Olsavsky said on the company’s conference call, “From our perspective, it’s a business that’s still really in day one.”

Amazon is deeply interested in expanding the business. Last year, it won a $600 million contract to host a cloud of computing services for the federal government’s 17 intelligence agencies. The contract was bitterly contested by IBM IBM -0.27% and Microsoft.
Microsoft’s cloud business is different. It starts around the Office 365 subscription product and adds a host of other services and its Azure web-hosting business. The sum of its cloud operations was annualizing at $6 billion or so, CEO Satya Nadella said during Thursday’s conference call with analysts.
And it’s growing rapidly, too, because the company is making its software available on as many platforms as possible. It was not a fluke last year that Microsoft made Office available to Apple’s iPad.
While many analysts argue that Microsoft’s future is limited because personal computer sales are declining, they are ignoring the huge businesses growing at Microsoft.
Second, there’s been a big explosion of real-estate construction in Seattle and to a lesser degree in Portland, Ore., three hours south on Interstate 5. This is because a critical mass of engineering talent that specializes in cloud technology is based in the Puget Sound area and the Pacific Northwest.
Google has an office in suburban Seattle and is expanding it. It’s also putting an office in Portland. Salesforce.com has an office. Facebook has signed a lease for 275,000 square feet of office space in downtown Seattle — enough room for 2,000 workers. Alibaba is reportedly looking at Seattle for its North American headquarters.

F5 Networks, based in Seattle, helps organization build vast networks so that applications work the way they should. Analysts see 2015 revenue topping $1.9 billion. Sure, the shares are down 5.6% this year. But they were up nearly 44% in 2014.

With earnings like those from Amazon and Microsoft, the real estate boom in the Northwest is likely to continue. And traffic jams in Seattle and Portland will get worse.

Lastly, let’s deal with Jeff Bezos’ big day on Friday. His stake in Amazon jumped in value by $4.6 billion to $37.4 billion — nearly the same as the market capitalization of Delta Air Lines ($37.7 billion). It’s now greater than the market caps of Yum! Brands and CSX. Moreover, Amazon shares are up 43% this year. So Bezos’ stake has grown by more than $11 billion.
Does it mean anything to him? He hasn’t much to worry about, and he doesn’t seem to panic to big swings in Amazon’s stock price.
Between a peak in January 2014 and a bottom at the end of April 2014 when the stock fell some 25%, the value of Bezos’ Amazon stake fell from $34 billion to a touch more than $25 billion.